MarkRogoThere continues to be a distinct and aggressive trend in western societies for the rich to get richer, and the middle class to stagnate. President Obama talked about this in his recent State of the Union Address when he stated, “Today, after four years of economic growth, corporate profits and stock prices have rarely been higher, and those at the top have never done better. But average wages have barely budged. Inequality has deepened. Upward mobility has stalled. The cold, hard fact is that even in the midst of recovery, too many Americans are working more than ever just to get by – let alone get ahead. And too many still aren’t working at all.”  He also alluded to the fact that inflation has eaten up the middle class worker’s paycheck so they are making 80% today what they were making during President Reagan’s final year in office, when he said, “Today, the federal minimum wage is worth about twenty percent less than it was when Ronald Reagan first stood here.” If you really wnat to have your head blown off your shoulder, go to adn watch this video clip. I have no idea if that is legit or not, but it’s an eye opener.

If that doesn’t convince you, read this article in the NY Times titled “The Middle Class is Steadily Eroding. Just ask the Business World.”  The meat of the article can be found in three paragraphs; “In 2012, the top 5 percent of earners were responsible for 38 percent of domestic consumption, up from 28 percent in 1995, the researchers found. Even more striking, the current recovery has been driven almost entirely by the upper crust, according to Mr. Fazzari and Mr. Cynamon. Since 2009, the year the recession ended, inflation-adjusted spending by this top echelon has risen 17 percent, compared with just 1 percent among the bottom 95 percent. More broadly, about 90 percent of the overall increase in inflation-adjusted consumption between 2009 and 2012 was generated by the top 20 percent of households in terms of income, according to the study, which was sponsored by the Institute for New Economic Thinking, a research group in New York.”
The point of this is that wealth generation should be a top priority for all of us. It’s largely acknowledged that social security will be a non-player in retirement income, and probably none at all in the top 5% of income producers. That chart shows that the top 1% of Americans own 40% of the entire wealth of the country, while they earn 24% of all payrolls, versus only 9% in 1976, the year I was married. The top 1% of Americans own 50% of the total stocks, bonds and mutual funds in the country. The bottom half of the country own only 1/2 of 1% of those same stocks, bonds and mutual funds.

I’m a big advocate of a free economy, but this is out of control. This kind of an economic trend towards a class division of massive inequality will follow the same pattern that it has throughout history; ultimate class warfare and a revolution.  Warren Buffet gets it with his commitment to donate 50% or more of his estate to charity upon his demise. Wall Street barons and entrepreneurs have a social responsibility towards the lower segments of our society’s economic makeup, like it or not.

Some of our generation gets it, and some don’t.  Many of our friends have approached me to find the first home for their son or daughter.  I’m impressed by most of them.  One couple provided the capital to their son, but required him to generate the down payment, in order to have “skin in the game”.  Another client required that the his grandchildren agree to make the payments for the taxes and insurance and utilities, and maintain the property otherwise it reverted back to him in his investment portfolio.   Still another couple paid for the entire home for their son, but in his infinite wisdom, he chose to purchase a fourplex income property rather than a large house, recognizing that at his young age it was important to take advantage of this opportunity and use it as a stepping stone to wealth generation. Still another set of parents gave their children the choice, and so far the children are electing for small and maintainable condos that fit in their budget for taxes and maintenance. In all of these cases, the parents could easily write the check and buy the house, but their children are grounded and responsible. There wasn’t one case of the spoiled brat getting a free ride on daddy’s checkbook. We have solid friends.

Real estate is the road to financial security later on in life. I believe it’s safer, more manageable and will provide economic returns greater on a long term basis than the equities market. There is nothing better than to have solid tenants in buildings that you own, turning in rent checks every month, and generating positive cash flow that goes towards drawing down the principal.  With a proper plan in place, you can take advantage of the few loopholes left in the IRS Codes, and use Section 1031 to defer taxes on gains as you trade up and build a solid investment. In the meantime, appreciation becomes the equivalent of deferred gains and tenants are making you rich by paying your mortgage. It’s a win-win all the way around. If you are interested in diversifying your holdings into real estate income properties, call me and we can discuss details. In the meantime, unless your family is one of the 80 richest families that has a higher net worth than the bottom 3.5 billion people on earth, join the rest of us in our battle to stay current and build wealth for our families.